Government needs smarter IT to oversee bailout, financial overhaul

The forthcoming financial regulatory overhaul should arm the federal government with information technology to improve oversight of bailout programs, said witnesses from industry and the open government community during a hearing on Thursday.

A House Financial Services subcommittee examined legislation that would establish IT systems to oversee financial rescue funds, as the full committee prepares to enter a final round of hearings on President Obama's plan to overhaul the nation's financial regulatory structure.

The full committee announced this week that it plans to start moving legislation soon after Oct. 9. Tools that agencies could use to carry out the legislation include a comprehensive database on the allocation of bailout funds, location-based systems to predict where foreclosures might occur and software for so-called stress tests of major banks' financial stability.

Recent stress tests of the 19 largest banks show weaknesses in the government's technological tool box, witnesses told the oversight and investigations subcommittee. Financial institutions had developed a one-time, manual process that involved many bank personnel and many conversations with regulators to clarify the requirements of the stress tests.

While the banks met the requirements, the information generated cannot be easily automated or repeated, said Thomas Kimner, a risk manager at analytical software provider SAS.

With additional stress tests anticipated, "unless the banks invest in additional technology to automate the process, such future requests will again be one-off exercises that could be quite debilitating to the banks and of marginal relevance to the regulators," Kimner testified. "But, the issue is not simply to automate the process from the banks' perspective; the regulators need the same sort of analytical tools to better analyze the information they are receiving."

He added that stress testing software would give institutions the ability to compile millions of financial instruments, stress test across product lines, and adjust for different economic and market factors as appropriate.

"We need to provide relief to financial institutions, too, that are overburdened with unnecessary filings," said Rep. Carolyn Maloney, D-N.Y.

Witness Dilip Krishna, a vice president at data analytics firm Teradata, said in an interview that pulling together data for stress tests is just one example of the regulatory benefits of aggregating financial information. The company already helps banks analyze their own risk factors, including exposure to complicated financial instruments. "The federal agencies should do the same thing using existing data," he said.

Teradata supports H.R. 1242, a bill introduced by Maloney in March, that would add more transparency to the bailout program with a continuously updated database containing information on the distribution of funds.

At the hearing, Stephen C. Horne, a vice president for master database management at Dow Jones, gave examples of tools his company already provides that the bailout database or other financial regulatory programs could use immediately. For example, Dow Jones offers a database of individuals and entities that, based on their prior history, could pose a risk to the companies doing business with them.

The Treasury Department currently subscribes to many different sources of data, including Dow Jones services, he said. But the data exists in incompatible formats that cannot be compared or combined to uncover anomalies and other usable information, Horne added.

"The key to obtaining transparency is in the integration of the disparate sources and the analysis of the aggregate data to provide answers to key questions," Horne testified. "This process allows for the transformation of data into information."

Ari Schwartz, a vice president at the Center for Democracy and Technology, a Washington civil liberties group that supports open access to government information, testified that he also supports the bailout tracking bill. He urged lawmakers to strengthen it by explicitly stipulating that nonproprietary parts of the database be made publicly available on the Web.

"Providing TARP [Troubled Assets Relief Program] information directly to the public online will strengthen oversight by making it possible for the media, watchdog groups, researchers and concerned citizens . . . to analyze the data, reuse it and present it in novel ways, and uncover risky practices among TARP institutions," Schwartz said in written testimony.

A representative from Management Association for Private Photogrammetric Surveyors, an association of private mapping firms, recommended that the bailout-tracker bill add a geographic information systems component to pictorially detail where bailout expenditures have occurred or will occur.

The panel also discussed legislation, H.R. 932, which authorizes grants for local governments suffering population loss to develop property-locator systems, early warning systems and vacant property inventories. In essence, geographic-tracking technologies could graphically link property records and land parcels to identify vacancies -- or combine tax and foreclosure information on maps to predict where more foreclosures might occur.

Schwartz asked the committee to require that the bill, proposed in February by Rep. Tim Ryan, D-Ohio, include privacy and security protections. While information and images of addresses and land are publicly available online, tying such content to financial and property records poses privacy and identity theft risks, Schwartz testified. He specifically recommended providing notice to individuals and seeking consent from them before information is collected and shared.

In an interview, Schwartz said the proposed TARP database is covered by the Privacy Act, so safeguards would be built in to the system. But, with geographic information systems, each county employs different -- and sometimes no -- privacy standards. To ensure privacy is protected in any centralized system, he recommended that the government first conduct a so-called privacy impact assessment before combining location information. Such assessments examine whether appropriate controls are in place to ensure compliance with federal privacy regulations.

Susan Marlow, founder and chief executive officer of Smart Data Strategies, a geographic information services company that provides land records management software, argued that an early warning system based on the location of foreclosed properties could have prevented the global financial crisis. She was speaking on behalf of MAPPS.

"If you have the right tools and the right data in place you could build predictive models using very basic statistical analysis that accurately forecast where foreclosure and delinquency hot spots are likely to occur, thus providing an early warning system," Marlow testified.

But census tract data is unsuitable for the task. Census partitioning is based on roads, creeks and other natural boundaries, as opposed to the more appropriate so-called parcel layer, which is based on the value, improvements, taxes and physical location of property. This layer of geography is measured at a local level, mostly for tax purposes, which means that each local jurisdiction defines its own parcel standards based on its unique needs.

"There are some 3,200 counties in the United States and as a result, when it comes to parcel data, there are 3,200-plus puzzle pieces that don't quite fit together," she testified. "However, with the proper coordination, they certainly could."

Schwartz in an interview said the parcel layer tools sounded reasonable and feasible. "That's great . . . all we're asking is that you do a privacy impact assessment [first]."